The Cap Rate Calculator computes the capitalization rate for any income-producing real estate investment by dividing the property's Net Operating Income (NOI) by its purchase price or current market value. The cap rate is the real estate equivalent of an earnings yield — it tells you the unlevered return you'd earn if you bought the property in cash and held it for one year, before financing costs and taxes.

Cap rate is the most widely used valuation metric in commercial real estate and multifamily investing. It enables investors to compare properties across different markets, property types, and price points on a consistent basis. A retail strip center in suburban Atlanta with a 7.2% cap rate is generating more NOI per dollar of value than an apartment building in Los Angeles priced at a 4.1% cap — though the difference reflects market dynamics, growth expectations, and risk profiles, not simply one being "better" than the other.

Who uses cap rate analysis?

• Commercial real estate investors evaluating office, industrial, retail, and multifamily properties for acquisition.
• Real estate brokers pricing listings and advising sellers on realistic asking prices based on market cap rates.
• Lenders and appraisers valuing commercial properties using the income approach (NOI ÷ market cap rate = value).
• Residential investors analyzing small multifamily (2–4 units) and small apartment buildings.
• REITs and institutional investors benchmarking portfolio performance and acquisition underwriting.

According to CBRE's U.S. Cap Rate Survey H2 2025, U.S. cap rates stabilized in the second half of 2025 across most property types, with improving liquidity and growing investor confidence that yields have passed their cyclical peak. In Canada, cap rates for similar property classes are generally 25–75 basis points lower than U.S. equivalents in major urban centers, reflecting tighter supply and different financing structures per CMHC's market data.

The cap rate formula is elegantly simple — but calculating the correct NOI requires careful attention to what's included and excluded.

Market cap rate benchmarks (H2 2025, per CBRE):

• Multifamily (Class A urban): 4.5–5.5%
• Multifamily (suburban/secondary): 5.5–6.5%
• Industrial (Class A): 5.0–6.0%
• Retail (strip/neighborhood): 6.0–7.5%
• Office (Class B/C suburban): 7.0–9.0%+ (distressed)
• Sunbelt secondary markets: typically 50–100 bps higher than primary markets

1. Gather the income data. For an existing property, request a Rent Roll showing all unit rents and current occupancy. For a purchase under contract, use the seller's provided rent roll and verify it against market rents for comparable units in the area. Gross Scheduled Income is the theoretical maximum rent if 100% occupied at market rent.
2. Apply a vacancy and credit loss factor. Most lenders and appraisers use 5–8% vacancy for stabilized properties in strong markets, 8–12% for value-add properties or softer markets. Do not use the seller's current occupancy (90–95%) without independently verifying it's sustainable at the current rent levels. A 5% vacancy on $216,000 GSI = $10,800 deduction; 8% = $17,280.
3. Calculate operating expenses carefully. Request 2–3 years of actual operating history (Schedule E from tax returns or a detailed income/expense statement). Key expense ratios as percentage of EGI: property taxes (typically 1–2% of value/year); insurance (0.3–0.5% of value/year); management (8–10% of EGI if self-managing, reduce by the going market rate); maintenance/repairs ($1,200–$2,000/unit/year for older residential properties); reserves for replacement (5% of EGI for residential; 3% for newer commercial).
4. Enter NOI and purchase price. The calculator instantly shows the cap rate. Compare to the market rate from CBRE's cap rate survey for your property type and market. A property at 6.7% in a 6.5% market is modestly attractive. A property at 5.0% in a 6.5% market is significantly overpriced — or the seller is using manipulated NOI.
5. Use the reverse formula for property valuation. If you know the market cap rate is 6.5% and you've determined NOI is $120,000, the indicated market value is $120,000 ÷ 0.065 = $1,846,154. If the seller is asking $2,200,000, the property is priced at a 5.45% cap — well below market — and will likely not appraise at the purchase price.
6. Layer in financing to calculate cash-on-cash return. Cap rate is an unlevered metric. To see your actual return on invested equity, use the Cash-on-Cash Return Calculator (separate tool) once you've determined NOI. The spread between cap rate and your mortgage interest rate determines the leverage benefit — if the cap rate exceeds your mortgage rate, leverage increases your equity return.

Cap rate is a market-derived metric — the same property should theoretically have the same cap rate as comparable properties in the same market and submarket. Deviations from market cap rates signal either an opportunity or a problem.

Cap rate vs. risk: Cap rates are inversely related to perceived quality and safety. A 4.5% cap Class A apartment in Los Angeles is priced for stability, strong rent growth potential, and minimal vacancy risk. A 9.0% cap office building in a secondary market offers higher current yield but with material lease rollover risk, potential for tenant vacancy, and possible capital expenditure needs. Higher cap rates don't automatically mean better investments — they reflect higher risk.

Cap rate vs. the 10-Year Treasury: Real estate cap rates have historically maintained a spread of 150–300 basis points above the 10-Year U.S. Treasury yield to compensate for illiquidity and management burden. When the 10-Year yield is at 4.3% (early 2025 levels per the Federal Reserve H.15 release), a cap rate of 5.8%–7.3% represents a reasonable risk premium. Cap rates below this spread (say, 4.0% when Treasuries yield 4.3%) imply the market is pricing in significant rent growth to justify the return gap.

NOI quality matters as much as the number: An NOI built on market-rate rents with diverse tenants and long remaining lease terms is much higher quality than the same NOI built on below-market rents scheduled for renewal, a single large tenant, or above-market rents that haven't been stress-tested. Always analyze the rent roll for lease expiration concentration, tenant quality, and market rent comparables before relying on a stated NOI.

Cap rate compression and value-add: If you can increase NOI through renovation, lease-up, or expense reduction, the resulting property value increases are amplified by the market cap rate. An NOI increase of $20,000 in a 6% cap rate market increases property value by $20,000 ÷ 0.06 = $333,333 — a 16.7:1 multiple on the income improvement. This is why value-add real estate can generate outsized returns relative to other investment types.

• Always verify NOI from tax returns, not the seller's proforma. Sellers present proforma NOI — based on potential rents and optimistic expense projections. Request Schedule E (for residential) or actual operating statements for 3 years and calculate NOI yourself from actual income and expenses. Proforma NOI is almost always 10–30% above actual NOI on value-add properties.
• Do not include mortgage debt service in the NOI calculation. NOI is a pre-financing metric. Including mortgage payments in the expense calculation produces a "debt-encumbered yield" that is not comparable across properties with different capital structures. This is one of the most common mistakes made by new real estate investors.
• Include a realistic management expense even if self-managing. Self-management has a real opportunity cost — your time has value. Including a 8–10% property management expense in NOI provides a more conservative and market-comparable cap rate calculation. It also means your NOI is defensible if you ever sell to a buyer who will hire professional management.
• Factor reserves for replacement into NOI. A property that shows no maintenance expense in the seller's documents is either brand-new or has deferred maintenance that will materialize as capital expenditure for the buyer. Industry standard reserves of 5% of effective gross income (per Appraisal Institute guidelines) should always be included, even if historical maintenance was lower.
• Compare your cap rate to local market data, not national averages. National cap rate averages mask enormous local variation. A 5.5% cap rate is excellent in Boston and poor in Memphis, where the same property type might trade at 7.0%+. Use CBRE's market-specific survey data or local broker opinion of value to establish the relevant benchmark.
• Model the exit cap rate for long-term IRR analysis. Most commercial real estate investments are analyzed on a 5–10 year hold. Your entry cap rate is known; the exit cap rate is uncertain. Run sensitivity scenarios: if you buy at 6.5% and sell at 7.0% (cap rate expansion = value declined), does the deal still generate acceptable returns? If yes, you have cap rate compression buffer built into the underwriting.